OLD SECOND BANCORP INC

Previous wording

We provide a wide range of financial services through our 48 banking locations located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and Will counties in Illinois. These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services. We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to providing for the financial services needs of the communities in which we operate through our retail branch network. We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area. Our market area includes a mix of commercial and industrial, real estate, and consumer related lending opportunities, and provides a stable, loyal core deposit base. We also offer extensive wealth management services, which include a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts, including employee benefit plan administration services.

Current wording

We provide a wide range of financial services through our 53 banking locations located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and Will counties in Illinois. These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services. We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to providing for the financial services needs of the communities in which we operate through our retail branch network. We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area. Our market area includes a mix of commercial and industrial, real estate, and consumer related lending opportunities, and provides a stable, loyal core deposit base. We also offer extensive wealth management services, which include a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts, including employee benefit plan administration services.

Previous wording

On December 1, 2021, we closed on our acquisition of West Suburban Bancorp, Inc. (“West Suburban”), and its wholly owned subsidiary, West Suburban Bank. As a result of this transaction, we acquired $1.07 billion of securities available-for sale at fair value, $1.50 billion of loans, net of fair value adjustments, and $2.69 billion of deposits, net of fair value adjustments. The transaction resulted in us increasing our presence in the west suburban Chicago area, as 34 branches were acquired with a retail and commercial client mix of loans and deposits. Historical periods before December 1, 2021, reflect results of our legacy operations. Subsequent to closing, results reflect all post-acquisition activity of the combined Company.

Current wording

On December 6, 2024, we closed on our branch purchase and assumption agreement with First Merchants Bank (“FRME”). As a result of this transaction, we assumed approximately $268.0 million in deposits related to the branch locations and purchased approximately $7.1 million in branch-related loans along with the purchase of other branch-related assets. The transaction resulted in increasing our presence in the south suburban Chicago area, as five branches were acquired with a retail and commercial client mix of loans and deposits. Historical periods before December 6, 2024, reflect results of our legacy operations. Subsequent to closing, results reflect all post-transaction activity.

Previous wording

In 2023, we recorded net income of $91.7 million, or $2.02 per fully diluted share, compared to $67.4 million, or $1.49 per fully diluted share, in 2022, and $20.0 million, or $0.65 per fully diluted share, in 2021. Our basic earnings per share for the periods presented were $2.05 in 2023, $1.51 in 2022 and $0.66 in 2021.

Current wording

In 2024, we recorded net income of $85.3 million, or $1.87 per fully diluted share, compared to $91.7 million, or $2.02 per fully diluted share, in 2023, and $67.4 million, or $1.49 per fully diluted share, in 2022. Our basic earnings per share for the periods presented were $1.90 in 2024, $2.05 in 2023 and $1.51 in 2022.

Previous wording

Our 2023 net income increased primarily as a result of the rising interest rate environment throughout much of 2023. Adjusted net income, a non-GAAP financial measure that excludes, litigation expense, net gains on branch sales, and Visa portfolio deconversion/liquidation costs was $92.9 million in 2023. See the discussion entitled “Non-GAAP Financial Measures” on page 44 and the table below, which provides a reconciliation of this non-GAAP measure and related items, to the most comparable GAAP equivalents.

Current wording

Our 2024 net income, as compared to the prior year, decreased primarily as a result of deposit interest expense outpacing our increased interest income throughout much of 2024, as well as additional costs incurred with our FRME branch transaction. Adjusted net income, a non-GAAP financial measure that excludes transaction-related costs, litigation expense, and net gains on branch sales was $85.9 million in 2024. See the discussion entitled “Non-GAAP Financial Measures” on page 51 and the table below, which provides a reconciliation of this non-GAAP measure and related items, to the most comparable GAAP equivalents.

Previous wording

Adjusted net income provides for a comparative analysis of our performance excluding those one time matters, such as litigation expense related to a claim regarding prior years’ overdraft fee compliance, net gains stemming from branch sales completed to eliminate duplicative geographic locations due to the West Suburban acquisition, and the Visa credit card and land trust portfolio sales were executed to exit products that were not within our strategic plan.

Current wording

Adjusted net income provides for a comparative analysis of our performance excluding those one-time matters, such as transaction-related costs for our purchase of five FRME branches, litigation expense related to a claim regarding prior years’ overdraft fee compliance, net gains or net losses stemming from branch sales completed to eliminate duplicative geographic locations due to past acquisitions, and the Visa credit card and land trust portfolio sales, which were executed to exit products that were not within our strategic plan.

Previous wording

Net interest and dividend income increased $45.8 million, or 22.2% for 2023 compared to 2022, due primarily to loan growth and the impact of market interest rate increases on loans and securities. Average loans, including loans held-for-sale, increased $362.5 million, or 9.96%, in 2023 compared to 2022. Organic loan growth in 2023 drove increases in our leases, commercial real estate-investor, and multi-family loan portfolios. Total interest and dividend income growth in 2023, compared to 2022, resulted in a 157 basis point increase in average rates earned on interest earning assets. Average interest bearing deposits decreased $423.3 million, or 12.9%, for 2023 compared to 2022, while average deposit rates increased 44 basis points over the same period. The increase in deposit rates was primarily due to an increase in the average time deposit rates and increased rates for NOW and money markets. Average noninterest bearing deposits decreased by $190.5 million, or 9.1%, from 2022 to 2023.

Current wording

Net interest and dividend income decreased $10.3 million, or 4.1% for 2024 compared to 2023, due primarily to increased interest expense due to higher market rates on deposits throughout 2024, partially offset by the impact of market interest rates on loans, and lower average balances on FHLBC advances. Average loans, including loans held-for-sale, decreased $13.4 million, or 0.33%, in 2024 compared to 2023. Total interest and dividend income growth in 2024, compared to 2023, resulted in a 31 basis point increase in average rates earned on interest earning assets. Average interest bearing deposits decreased $36.6 million, or 1.3%, for 2024 compared to 2023, while average deposit rates increased 81 basis points over the same period. The increase in deposit rates was primarily due to growth in exception priced deposits and higher rates overall offered to customers, which impacted deposit expense in all interest bearing deposit categories. Average noninterest bearing deposits decreased by $158.7 million, or 8.3%, from 2023 to 2024.

Previous wording

We continued to reposition our balance sheet in 2023 to provide appropriate funding for loan growth, ensure adequate liquidity, reduce asset quality risk, and to decrease the rising interest rate risk on our cost of funds. In 2023, our available-for-sale securities portfolio decreased $346.5 million, compared to year-end 2022, due primarily to $205.7 million of strategic sales and $186.0 million of paydowns, maturities, and calls. These decreases in 2023 were partially offset by security purchases of $13.4 million. The unrealized mark to market adjustment on securities was an $84.2 million unrealized loss as of December 31, 2023, compared to a $123.5 million unrealized loss at December 31, 2022, due primarily to market interest rate increases. Average interest bearing liabilities increased $121.8 million, to $3.34 billion in 2023 from $3.46 billion in 2022. Total average borrowings increased $301.5 million to $492.0 million compared to $190.5 million in 2022. The increase in average borrowings was primarily due to a $343.5 million increase in other short-term borrowings due to additional FHLB advances throughout 2023 that helped to fund loan growth. During 2023, we paid off our notes payable and our senior notes, resulting in a decrease in average borrowings of $11.9 million and $22.5 million, respectively.

Current wording

We continued to reposition our balance sheet in 2024 to ensure adequate liquidity, reduce asset quality risk, and to offset the rising interest rate risk on our cost of funds. In 2024, our available-for-sale securities portfolio decreased $31.1 million, compared to year-end 2023, due primarily to $304.2 million of paydowns, maturities, and calls and $5.3 million of strategic sales. These decreases in 2024 were partially offset by security purchases of $265.5 million. The unrealized mark to market adjustment on securities was a $68.6 million unrealized loss as of December 31, 2024, compared to an $84.2 million unrealized loss at December 31, 2023, due primarily to changes in market interest rates and the portfolio holdings mix year over year. Average interest bearing liabilities decreased $133.8 million, to $3.21 billion in 2024 from $3.34 billion in 2023. Total average borrowings decreased $97.3 million to $394.7 million compared to $492.0 million in 2023. The decrease in average borrowings was primarily due to a $84.8 million decrease in other short-term borrowings due to a reduction in FHLBC advances throughout 2024. During 2023, we paid off our notes payable and our senior notes, resulting in a decrease in average borrowings of $1.3 million and $22.0 million, respectively.

Previous wording

Management also continued to emphasize credit quality and maintained our capital ratios with continued strong liquidity. In 2023, we experienced loan growth of $173.3 million, or 4.5%, over 2022. The growth was driven primarily by originations of loans from the sponsor finance team, as well as growth in leasing, commercial real estate-investor, and multi-family loans. Asset quality levels have decreased slightly over the last few years relative to total assets, with nonperforming assets of $73.9 million, or 1.29%, of total assets for 2023, compared to $34.5 million, or 0.59% of total assets for 2022, and $47.0 million, or 0.76% of total assets, for 2021, with the total dollar increase in 2023, compared to 2022, primarily due to the increase in nonaccrual loans of $36.0 million. However, recent economic circumstances have created pressure on portions of the portfolio such as office and assisted living facility loans. We continue to take steps to control operating expenses and increase noninterest income.

Current wording

Management also continued to emphasize credit quality and maintained our capital ratios with continued strong liquidity. In 2024, we experienced a decrease in loans of $61.6 million, or 1.5%, over 2023. Nonperforming assets decreased slightly in 2024 and 2023 relative to total assets, with nonperforming assets of $51.9 million, or 0.92%, of total assets for 2024, compared to $73.9 million, or 1.29% of total assets for 2023, and $34.5 million, or 0.59% of total assets, for 2022. The total dollar decrease in 2024, compared to 2023, was primarily due to a decrease in nonaccrual loans of $38.7 million, partially offset by a $16.5 million increase in OREO. We continue to take steps to control operating expenses and increase noninterest income.

Previous wording

As we focused on reducing noninterest expenses, exclusive of acquisition-related activity, we were also able to maintain our profitable wealth management business, and continue profitability, though to a lesser extent, with the mortgage banking business as originations and sales were negatively impacted by elevated interest rates.

Current wording

As we focused on reducing noninterest expenses, exclusive of acquisition-related activity, we were also able to maintain our profitable wealth management business, and continue profitability, though to a lesser extent, with the mortgage banking business as originations and sales are negatively impacted by elevated interest rates.

Previous wording

As a result of management’s modeling, we recorded an ACL on loans of $44.3 million as of December 31, 2023; in addition, we recorded an ACL on unfunded commitments of $2.7 million as of December 31, 2023, included within other liabilities. We recorded provision for credit losses of $16.5 million in 2023, comprised of $18.1 million of provision for credit loss expense on loans, and a $1.6 million release of provision on unfunded commitments. In 2022, we recorded a provision for credit losses of $6.6 million, comprised of a $6.8 million provision for credit loss expense on loans, and a $200,000 release of provision for credit losses on unfunded commitments. In 2021, we recorded a provision for credit losses of $4.3 million, comprised of a $9.4 million release of provision for credit losses expense on loans, a $12.2 million Day Two non-PCD credit mark on West Suburban acquired loans, and a $1.5 million provision for credit losses on unfunded commitments. In addition, a discussion of the factors driving changes in the amount of the ACL is included in the “Allowances for Credit Losses” section below.

Current wording

As a result of management’s modeling, we decreased our ACL on loans to $43.6 million as of December 31, 2024; in addition, we decreased our ACL on unfunded commitments to $1.9 million as of December 31, 2024, included within other liabilities. We recorded provision for credit losses of $12.8 million in 2024, comprised of $13.6 million of provision for credit loss expense on loans, and a $834,000 release of provision on unfunded commitments. In 2023, we recorded a provision for credit losses of $16.5 million, comprised of an $18.1 million provision for credit loss expense on loans, and a $1.6 million release of provision for credit losses on unfunded commitments. In 2022, we recorded a provision for credit losses of $6.6 million, comprised of a $6.8 million provision for credit loss expense on loans, and a $200,000 release of provision for credit losses on unfunded commitments. In addition, a discussion of the factors driving changes in the amount of the ACL is included in the “Allowances for Credit Losses” section below.

Previous wording

Our net interest income increased $45.8 million, or 22.2%, to $251.9 million for 2023, from $206.2 million for 2022. The increase in 2023 was primarily driven by loan growth and the rising interest rate environment through much of 2023. Our net interest margin, which is net interest income divided by total interest-earning assets, was 4.64% for the year ended 2023, compared to 3.63% for the year ended 2022, an increase of 101 basis points. Our net interest margin on a taxable equivalent (TE) basis was 4.67% for the year ended 2023, compared to 3.65% for the year ended 2022, an increase of 102 basis points. Average interest earning assets decreased $255.1 million during 2023 as volume slowed and rates reflected significant growth, impacting net interest income. The increase in interest expense in 2023 compared to 2022 was due primarily to an expense increase in all interest bearing deposit categories due to rising rates, as well as higher average balances (FHLB advances) in our short-term funding throughout 2023.

Current wording

Our net interest income decreased $10.3 million, or 4.1%, to $241.6 million for 2024, from $251.9 million for 2023. The decrease in 2024 was primarily driven by the higher interest rate environment through much of 2024, which resulted in our cost of funds increasing primarily due to CD specials, exception pricing on deposits and higher rates paid on short-term borrowings. Our net interest margin, which is net interest income divided by total interest-earning assets, was 4.61% for the year ended 2024, compared to 4.64% for the year ended 2023, a decrease of three basis points. Our net interest margin on a taxable equivalent (TE) basis was 4.63% for the year ended 2024, compared to 4.67% for the year ended 2023, a decrease of four basis points. Average interest earning assets decreased $185.4 million during 2024 as volume slowed and rates reflected significant growth, impacting net interest income. The increase in interest expense in 2024 compared to 2023 was due primarily to an expense increase in all interest bearing deposit categories due to higher rates, partially offset by lower average balances in our short-term funding (FHLBC advances) throughout 2024.

Previous wording

Our average earning assets decreased $255.1 million, or 4.5%, to $5.43 billion in 2023, from $5.68 billion in 2022. The decrease was primarily attributable to a decrease in our securities portfolio and our interest earning deposits, partially offset by organic leases, commercial real estate and multifamily loan growth. Our average earning assets increased $2.41 billion, or 73.7%, to $5.68 billion in 2022, from $3.27 billion in 2021. The increase was primarily attributable to an increase in our securities and loan portfolios, primarily due to the West Suburban acquisition, in addition to organic commercial, lease financing, and commercial real estate loan growth.

Current wording

Our average earning assets decreased $185.4 million, or 3.4%, to $5.24 billion in 2024, from $5.43 billion in 2023. The decrease was primarily attributable to a decrease in our securities portfolio. Our average earning assets decreased $255.1 million, or 4.5%, to $5.43 billion in 2023, from $5.68 billion in 2022. The decrease was primarily attributable to a decrease in our securities portfolio and our interest earning deposits, partially offset by organic leases, commercial real estate and multifamily loan growth.

Previous wording

Our average interest bearing liabilities decreased $121.8 million, or 3.5%, to $3.34 billion for 2023, from $3.46 billion in 2022, due primarily to a decrease in all deposit categories, which was partially offset by a noteworthy increase in other short-term borrowings. Interest bearing deposits decreased by $423.3 million, or 12.9%, to $2.85 billion in 2023, compared to $3.27 billion in 2022, due primarily to the decrease in all deposit categories. Our average borrowings increased $301.5 million to $492.0 million in 2023 from $190.5 million in 2022. This was mainly due to an increase of $343.5 million in average other short-term borrowings due to obtaining FHLB advances throughout the entirety of 2023. Partially offsetting the increase in our average other short-term borrowings was a decrease of $7.6 million in average securities sold under repurchase agreements, a $22.5 million decrease in average senior notes as the remaining principal balance was paid off in its entirety in June 2023, and a $11.9 million decrease in average notes payable as the term loan was paid off in its entirety in February 2023.

Current wording

Our average interest bearing liabilities decreased $133.8 million, or 4.0%, to $3.21 billion for 2024, from $3.34 billion in 2023, due primarily to a decrease in all deposit categories other than time deposits, as well as a noteworthy decrease in other short-term borrowings. Average interest bearing deposits decreased by $36.6 million, or 1.3%, to $2.81 billion in 2024, compared to $2.85 billion in 2023. Our average borrowings decreased $97.3 million to $394.7 million in 2024 from $492.0 million in 2023. This was mainly due to a decrease of $84.8 million in average other short-term borrowings due to a reduction in FHLBC advances throughout 2024. Also contributing to the decrease in our average borrowings was a $22.0 million decrease in average senior notes as the remaining principal was paid off in its entirety in June 2023 and a $1.3 million decrease in average notes payable as the term loan was paid off in its entirety in February 2023. Partially offsetting the decrease in our average borrowings was an increase of $10.7 million in average securities sold under repurchase agreements.

Previous wording

2* *Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, discussed below, and includes net costs of $2.7 million for 2023, and fee income of $3.0 million for 2022 and $5.8 million for 2021. Nonaccrual loans are included in the above stated average balances.

Current wording

2* *Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, discussed below, and includes net costs of $1.8 million for 2024, net costs of $2.7 million for 2023, and net fees of $3.0 million for 2022. Nonaccrual loans are included in the above stated average balances.

Previous wording

We recorded a $16.5 million provision for credit losses in 2023, an increase of $10.0 million, from 2022. The increase in provision expense over the prior year was primarily due to loan growth of $173.3 million in 2023, and current-year net charge offs, partially offset by improved economic factors. The 2022 provision for credit losses of $6.6 million compared to $4.3 million in 2021 was primarily due to loan growth of $448.8 million in 2022, partially offset by improved economic factors.

Current wording

We recorded a $12.8 million provision for credit losses in 2024, a decrease of $3.8 million, from 2023. The decrease in provision expense over the prior year was primarily due to the decrease in loans of $61.6 million in 2024, and lower current-year net charge offs, as well as improved asset quality and economic factors. The 2023 provision for credit losses of $16.5 million compared to $10.0 million in 2022 was primarily due to loan growth of $173.3 million in 2023 and prior-year net charge offs, partially offset by improved economic factors.

Previous wording

Our total noninterest income decreased $8.9 million, or 20.7%, to $34.2 million for 2023, compared to $43.1 million for 2022. The decrease was primarily due to:

Current wording

Our total noninterest income increased $9.6 million, or 28.2%, to $43.8 million for 2024, compared to $34.2 million for 2023. The increase in 2024 from 2023 was primarily due to:

Previous wording

Our total noninterest income increased $3.9 million, or 9.8%, to $43.1 million for 2022, compared to $39.3 million for 2021. This increase was due to growth in wealth management of $479,000, service charges on deposits of $4.2 million, mark to market gains on MSRs of $1.9 million, card related income of $4.3 million, and other income of $2.9 million. Partially offsetting these increases were reductions in secondary mortgage fees of $712,000, or 68.2%, in 2022 compared to 2021, as well as a reduction in the net gain on sales of mortgage loans of $7.3 million, or 78.3%, over the same period, each due to a reduction in secondary market mortgage loan origination volumes in 2022 due to the rising rate environment. Finally, net securities losses of $944,000 were recorded in 2022, compared to $232,000 of net securities gains in 2021, reflecting strategic security sales in 2022 given the increasing rate environment resulting in downward pressure on the bond market during the year. We had no BOLI death benefit proceeds in 2022 or 2021.

Current wording

Our total noninterest income decreased $8.9 million, or 20.7%, to $34.2 million for 2023, compared to $43.1 million for 2022. The decrease was primarily due to lower mortgage banking earnings of $5.3 million, driven by mark to market losses on MSRs of $1.4 million in 2023, compared to mark to market gains on MSRs of $3.2 million recorded in 2022, primarily due to changes in market interest rates and prepayment speeds in 2023. Also contributing to the lower mortgage banking earnings in 2023 was a decrease of $545,000 related to net gains on sales of mortgage loans. In addition, total noninterest income decreased in 2023, compared to 2022, due to net securities losses of $4.1 million in 2023, compared to net securities losses of $944,000 in 2022, reflecting strategic sales in 2023 given the increasing rate environment resulting in downward pressure on the bond market during the year, a $938,000, or 8.5%, decrease in card-related income in 2023, compared to 2022, and a $1.0 million decrease in other income, primarily due to a $743,000 gain on a Visa credit card portfolio sale and a $180,000 gain on the sale of a land trust portfolio, both recorded in the third quarter of 2022. Partially offsetting these decreases was an increase in service charges on deposits of $255,000 and a $1.4 million increase in the cash surrender value of BOLI due to market interest rate changes. We had no BOLI death benefit proceeds in 2023 or 2022.

Previous wording

Partially offsetting these decreases to noninterest expense was a $2.0 million, or 2.3%, increase in salaries and employee benefits. Our number of full-time equivalent employees was 834 as of December 31, 2023, compared to 819 as of December 31, 2022. Also partially offsetting the decrease in noninterest expense was a $304,000, or 12.7%, increase in FDIC insurance, a $132,000, or 22.4%, increase in advertising expense for updated branding, a $775,000, or 17.8%, increase in card related expense, a $269,000 increase in other real estate owned expense due to six additions and nine disposals throughout 2023, and a $1.4 million increase in other expense primarily due to a $1.2 million litigation expense recorded in the fourth quarter of 2023 for a pending overdraft fee compliance claim.

Current wording

Our total noninterest expense decreased by $6.0 million, or 4.0%, in 2023 compared to 2022. The decrease was comprised of a $555,000, or 3.7%, decrease in occupancy, furniture and equipment expense primarily due to higher equipment and maintenance costs incurred in 2022, and an $8.5 million, or 53.9%, decrease in computer and data processing expense, both primarily due to merger-related costs incurred related to our acquisition of West Suburban in 2021 as systems conversion was performed in April 2022. In addition, 2023 reflected a $1.6 million, or 43.3%, decrease in net teller & bill paying services, primarily due to costs incurred in 2022 for new payment platforms related to our acquisition of West Suburban. Partially offsetting these decreases to noninterest expense was a $2.0 million, or 2.3%, increase in salaries and employee benefits. Our number of full-time equivalent employees was 834 as of December 31, 2023, compared to 819 as of December 31, 2022. Also partially offsetting the decrease in noninterest expense in 2023, as compared to 2022, was a $304,000, or 12.7%, increase in FDIC insurance, a $132,000, or 22.4%, increase in advertising expense for updated branding, a $775,000, or 17.8%, increase in card related expense, a $269,000 increase in other real estate owned expense due to six additions and nine disposals throughout 2023, and a $1.4 million increase in other expense primarily due to a $1.2 million litigation expense recorded in the fourth quarter of 2023 for an overdraft fee compliance claim.

Previous wording

Our income tax expense totaled $32.7 million for December 31, 2023 compared to an income tax expense of $24.1 million in 2022 and $7.8 million for 2021. The increase in income tax expense in 2023, compared to 2022, is commensurate with the growth in our pretax income. Income tax expense reflected all relevant statutory tax rates and GAAP accounting. Our effective tax rate was 26.3% for 2023, 26.4% for 2022, and 28.1% for 2021. Any changes in tax rates will be recorded in the period enacted.

Current wording

Our income tax expense totaled $27.7 million for December 31, 2024 compared to an income tax expense of $32.7 million in 2023 and $24.1 million for 2022. The decrease in income tax expense in 2024, compared to 2023, is commensurate with the decrease in our pretax income as well as with the new state ruling regarding tax rate apportionment factors related to income generated from securities or loans originated in other states. Income tax expense reflected all relevant statutory tax rates and GAAP accounting. Our effective tax rate was 24.5% for 2024, 26.3% for 2023, and 26.4% for 2022. Any changes in tax rates will be recorded in the period enacted.

Previous wording

Our total assets were $5.72 billion at December 31, 2023, a decrease of $165.5 million, or 2.8%, from December 31, 2022. Our total cash and cash equivalents decreased $15.0 million, driven by a decrease in interest earning deposits with financial institutions, primarily to fund loan growth and pay off rising rate debt.

Current wording

Our total assets were $5.65 billion at December 31, 2024, a decrease of $73.4 million, or 1.3%, from December 31, 2023. Our total cash and cash equivalents decreased $816,000, driven by a decrease in cash and due from banks, primarily to pay down short-term borrowings.

Previous wording

Our total securities decreased by $346.5 million, or 22.5%, for the year ended December 31, 2023, compared to 2022, primarily due to the $205.7 million of strategic sales, and $186.0 million of paydowns, maturities, and calls. These decreases in 2023 were partially offset by purchases of $13.4 million of securities as well as the $39.3 million reduction of unrealized losses recorded in 2023. We recorded pretax net security losses of $4.1 million in 2023.

Current wording

Our total securities decreased by $31.1 million, or 2.6%, for the year ended December 31, 2024, compared to 2023, primarily due to $304.2 million of paydowns, maturities, and calls and $5.3 million of strategic sales. These decreases in 2024 were partially offset by security purchases of $265.5 million as well as the $15.5 million reduction of unrealized losses recorded in 2024. We recorded no pretax net security gains or losses in 2024 compared to pretax net losses of $4.1 million in 2023.

Previous wording

At December 31, 2023, total stockholders’ equity was $577.3 million, compared to $461.1 million at December 31, 2022. The increase in stockholders’ equity primarily stems from net income of $91.7 million recorded in 2023 as well as the decrease in unrealized losses in the available for sale securities portfolio.

Current wording

At December 31, 2024, total stockholders’ equity was $671.0 million, compared to $577.3 million at December 31, 2023. The increase in stockholders’ equity primarily stems from net income of $85.3 million recorded in 2024 as well as the decrease in unrealized losses in the available for sale securities portfolio.

Previous wording

As shown below, we had moderate changes in the overall composition of our securities portfolio in 2023 versus 2022. The overall composition of our securities portfolio was largely consistent in 2022 versus 2021.

Current wording

As shown below, the overall composition of our securities portfolio was largely consistent in 2024 versus 2023, with moderate changes in the overall composition of our securities portfolio in 2023 versus 2022.

Previous wording

As of December 31, 2023, net unrealized losses on available-for-sale securities totaled $84.2 million, which, after the impact of the related deferred income taxes, resulted in an overall decrease to equity capital of $60.6 million. As of December 31, 2022, net unrealized losses on available-for-sale securities totaled $123.5 million, which after the impact of the related deferred income taxes, resulted in an overall decrease to equity capital of $88.9 million.

Current wording

As of December 31, 2024, net unrealized losses on available-for-sale securities totaled $68.6 million, which, after the impact of the related deferred income taxes, resulted in an overall decrease to equity capital of $49.4 million. As of December 31, 2023, net unrealized losses on available-for-sale securities totaled $84.2 million, which after the impact of the related deferred income taxes, resulted in an overall decrease to equity capital of $60.6 million.

Previous wording

Our total loans were $4.04 billion as of December 31, 2023, an increase of $173.3 million from $3.87 billion as of December 31, 2022. This increase was primarily due to loan growth of $120.8 million in our leases and $78.0 million in our multifamily portfolios. In addition, we experienced organic loan growth primarily in our commercial real estate – investor and residential real estate – owner occupied loan portfolios. We recorded total loan originations, excluding renewals, of $997.2 million in 2023, but we also experienced accelerated paydowns in 2023 due to higher levels of customer liquidity.

Current wording

Our total loans were $3.98 billion as of December 31, 2024, a decrease of $61.6 million from $4.04 billion as of December 31, 2023. This decrease was due to increased transfers into OREO and large payoffs. The largest decreases, net originations, were in commercial real estate – owner occupied for $113.3 million, in multifamily for $50.4 million, and in commercial for $41.2 million. Partially offsetting these declines, we experienced organic loan growth primarily in our leases and commercial real estate – investor loan portfolios. We recorded total loan originations, excluding renewals, of $1.03 billion in 2024, but we also experienced accelerated paydowns in 2024 due to higher levels of customer liquidity.

Previous wording

Management continues to emphasize loan portfolio quality, the increase of nonaccrual and classified loans is isolated to office buildings and assisted living centers, discussed in the “Asset Quality” section below. We recorded net loan charge-offs of $23.3 million in 2023, $1.6 million in 2022, and $4.4 million in 2021.

Current wording

Management continues to emphasize loan portfolio quality, and credit remediation continued in 2024. The decrease of nonaccrual and classified loans as of December 31, 2024, compared to the prior year end, is due to larger relationships with office buildings and assisted living centers that have been transferred into OREO, have been paid off, or have been upgraded in 2024, discussed in the “Asset Quality” section below. We recorded net loan charge-offs of $14.2 million in 2024, $23.3 million in 2023, and $1.6 million in 2022.

Previous wording

The quality of our loan portfolio is in large part a reflection of the economic health of the communities in which we operate. Our local communities have been relatively stable in the past five years. While there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, the real estate categories represented 68.8% and 70.6% of the portfolio at December 31, 2023 and 2022, respectively. Our lending exposure is diversified across our commercial, leasing, commercial real estate, residential real estate, construction loan, multifamily and HELOC portfolios, with total loan portfolio growth in each of the three years presented above. We had no concentration of loans exceeding 10% of total loans that were not otherwise disclosed as a category of loans at December 31, 2023. We remain committed to overseeing and managing our loan portfolio to avoid unnecessarily high credit concentrations in accordance with the general interagency guidance on risk management. Consistent with those commitments, management monitors our asset diversification and anticipates that the percentage of real estate lending in relation to the overall portfolio will decrease in the future.

Current wording

The quality of our loan portfolio is in large part a reflection of the economic health of the communities in which we operate. Our local communities have been relatively stable in the past five years. While there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, the real estate categories represented 67.2% and 68.8% of the portfolio at December 31, 2024 and 2023, respectively. Our lending exposure is diversified across our each of our segments presented above. Though 2024 experienced a net decline in the overall portfolio, leases and commercial real estate – investor continued to grow. We had no concentration of loans exceeding 10% of total loans that were not otherwise disclosed as a category of loans at December 31, 2024. We remain committed to overseeing and managing our loan portfolio to avoid unnecessarily high credit concentrations in accordance with the general interagency guidance on risk management. Consistent with those commitments, management monitors our asset diversification and anticipates that the percentage of real estate lending in relation to the overall portfolio will decrease in the future.

Previous wording

Nonperforming loans consist of nonaccrual loans and loans 90 days or greater past due. Prior to January 1, 2023, nonperforming loans also included performing troubled debt restructured loans accruing interest. Remediation work continues in all segments. Nonperforming loans increased year over year by $35.9 million to $68.8 million at December 31, 2023, and decreased by $11.8 million to $32.9 million at December 31, 2022, compared to December 31, 2021. Nonperforming assets, which includes nonperforming loans plus other real estate owned, totaled $73.9 million as of December 31, 2023, compared to $34.5 million as of December 31, 2022. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination. Nonperforming credit metrics increased in 2023, largely due to office buildings and senior/assisted living facilities, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans as a percent of total loans increased to 1.7% as of December 31, 2023, from 0.9% as of December 31, 2022, and 1.3% December 31, 2021. The distribution of our nonperforming loans is shown in the following table.

Current wording

Nonperforming loans consist of nonaccrual loans and loans 90 days or greater past due. Remediation work is ongoing in all relevant segments. Nonperforming loans decreased year over year by $38.5 million, or 56.0%, to $30.3 million at December 31, 2024, but increased by $35.9 million to $68.8 million at December 31, 2023, compared to December 31, 2022. Nonperforming assets, which includes nonperforming loans plus other real estate owned, totaled $51.9 million as of December 31, 2024, compared to $73.9 million as of December 31, 2023, and $34.5 million as of December 31, 2022. Nonperforming credit metrics decreased in 2024, largely due to office buildings and senior/assisted living facilities which were paid off, upgraded or transferred into OREO, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans as a percent of total loans decreased to 0.8% as of December 31, 2024, from 1.7% as of December 31, 2023, and 0.9% December 31, 2022. Our nonperforming loans by performance metric is shown in the following table.

Previous wording

The following table sets forth the amounts of nonperforming assets at December 31 for the years indicated:

Current wording

The following table sets forth the amounts of nonperforming assets by performance metric at December 31 for the years indicated:

Previous wording

Accrual of interest is discontinued on a loan when principal or interest is 90 days or more past due, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected in the current period is reversed against current period interest income. Interest income of approximately $1.9 million, $284,000 and $280,000 was recorded and collected during 2023, 2022 and 2021, respectively, on loans that subsequently went to nonaccrual status by year-end. Interest income, which would have been recognized during 2023, 2022 and 2021, had these loans been on an accrual basis throughout the year, was approximately $7.3 million, $2.7 million and $1.6 million, respectively.

Current wording

Accrual of interest is discontinued on a loan when principal or interest is 90 days or more past due, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected in the current period is reversed against current period interest income. Interest income of approximately $815,000, $1.9 million and $284,000 was recorded and collected during 2024, 2023 and 2022, respectively, on loans that subsequently went to nonaccrual status by year-end. Interest income, which would have been recognized during 2024, 2023 and 2022, had these loans been on an accrual basis throughout the year, was approximately $4.2 million, $7.3 million and $2.7 million, respectively.

Previous wording

Total past due loans, including accruing and nonaccrual loans, totaled $49.4 million at year-end 2023, a $27.2 million increase from year end 2022, resulting in the rate of past due loans to total loans increasing to 1.2% at year-end 2023 compared to 0.6% at year-end 2022, and 0.8% at year-end 2021. Refer to Note 5, “Loans and Allowance for Credit Losses on Loans”, in our Consolidated Financial Statements, below, for further detail of past due loans by classification for 2023 and 2022.

Current wording

Total past due loans, including accruing and nonaccrual loans, totaled $27.3 million at year-end 2024, a $22.1 million decrease from year end 2023, resulting in the rate of past due loans to total loans decreasing to 0.7% at year-end 2024 compared to 1.2% at year-end 2023, and 0.6% at year-end 2022. Refer to Note 5, “Loans and Allowance for Credit Losses on Loans”, in our Consolidated Financial Statements, below, for further detail of past due loans by classification for 2024 and 2023.

Previous wording

Total classified loans increased in 2023 compared to 2022, and increased in 2022 compared to 2021. The growth in 2023 is primarily due to an increase of $16.4 million of Commercial real estate – investor loans, an increase of $13.7 million of commercial real estate – owner occupied, and an increase of $15.8 million of construction, compared to 2022. In 2023, the increases to classified commercial real estate – owner occupied and commercial real estate – investor loans were driven by downgrades to loans collateralized by office buildings and senior/assisted living facilities. The growth in classified assets in 2022 over the prior year is primarily due to an increase of $16.7 million of Commercial real estate – investor loans, and an increase of $25.5 million of Commercial real estate – owner occupied loans, compared to 2021. In 2022, the increase to Commercial real estate – owner occupied was due to increased healthcare industry loans being categorized as substandard and the increase to commercial real estate – investor was due to three unrelated large loans being categorized as substandard. Total classified assets increased in 2023 compared to both 2022 and 2021. Classified assets, which includes classified loans and OREO, was impacted by a $3.6 million net increase in our OREO portfolio in 2023 from 2022, primarily due to the addition of two large office buildings in late 2023. Our OREO portfolio decreased $795,000 in 2022 from 2021. Management monitors a metric of classified assets to the sum of Bank Tier 1 capital and the ACL, which is referred to as the “classified assets ratio.” Our classified assets ratio increased to 21.66% at December 31, 2023, compared to 18.36% at December 31, 2022, from 13.79% at December 31, 2021.

Current wording

Total classified loans decreased in 2024 by $40.8 million compared to 2023, and increased in 2023 by $23.9 million compared to 2022. The decrease in 2024 is primarily due to a decrease of $29.3 million of Commercial real estate – investor loans and $27.0 million of commercial real estate – owner occupied, and partially offset by an increase of $16.3 million of commercial, compared to 2023. In 2024, the decrease to classified commercial real estate – owner occupied and commercial real estate – investor loans were driven by loan risk rating upgrades of $20.1 million for commercial real estate – owner occupied and $8.8 million for commercial real estate – investor, primarily in the healthcare industry. The rise in 2023 is primarily due to an increase of $16.4 million of Commercial real estate – investor loans, an increase of $13.7 million of commercial real estate – owner occupied, and an increase of $15.8 million of construction, compared to 2022. In 2023, the increases to classified commercial real estate – owner occupied and commercial real estate – investor loans were driven by downgrades to loans collateralized by office buildings and senior/assisted living facilities.

Previous wording

At December 31, 2023, the ACL on loans totaled $44.3 million, and the ACL on unfunded commitments, included in other liabilities, totaled $2.7 million, compared to the ACL on loans of $49.5 million and ACL on unfunded commitments of $5.1 million at December 31, 2022. The decrease was primarily due to large charge offs taken in the fourth quarter of 2023, which was partially offset by improved economic conditions.

Current wording

At December 31, 2024, the ACL on loans totaled $43.6 million, and the ACL on unfunded commitments, included in other liabilities, totaled $1.9 million, compared to the ACL on loans of $44.3 million and ACL on unfunded commitments of $2.7 million at December 31, 2023. The decrease was due to large charge offs taken in the fourth quarter of 2024 and changes with our economic forecast during the year.

Previous wording

One measure of the adequacy of the ACL is the ratio of the ACL on loans to total loans. The ACL as a percentage of total loans was 1.1% as of December 31, 2023 and 1.3% as of December 31, 2022. In management’s judgment, an adequate allowance for estimated losses has been established; however, there can be no assurance that losses will not exceed the estimated amounts in the future.

Current wording

One measure of the adequacy of the ACL is the ratio of the ACL on loans to total loans. The ACL as a percentage of total loans was 1.1% as of December 31, 2024 and as of December 31, 2023. In management’s judgment, an adequate allowance for estimated losses has been established; however, there can be no assurance that losses will not exceed the estimated amounts in the future.

Previous wording

During 2023, we recorded an $18.1 million of provision for credit losses expense on loans and a $1.6 million release of provision for credit losses on unfunded commitments. During 2022, we recorded a $6.8 million provision for credit losses expense on loans, and a $200,000 release of provision for credit losses on unfunded commitments.

Current wording

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected losses over the expected life of the loan portfolio as well as considering changes in macroeconomic conditions. During 2024, we recorded a $13.6 million of provision for credit losses expense on loans and a $834,000 release of provision for credit losses on unfunded commitments. During 2023, we recorded an $18.1 million provision for credit losses expense on loans, and a $1.6 release of provision for credit losses on unfunded commitments.

Previous wording

The provision for credit losses on loans is based upon management’s estimate of future expected credit losses in the loan and lease portfolio and its evaluation of the adequacy of the ACL. Our provision for credit losses in 2023 totaled $16.5 million, compared to $6.6 million in 2022, and $4.3 million in 2021. Net charge-offs recorded in 2023 totaled $23.3 million, compared to net charge-offs of $1.6 million recorded in 2022, and net charge-offs of $4.4 million in 2021. The increase of net charge offs in 2023 was due to six large charge offs taken on our commercial real estate, primarily with office buildings and senior/assisted living facilities, in 2023. Our ACL on loans to average loans was 1.1% as of December 31, 2023, compared to 1.4% at December 31, 2022 and 2.2% at December 31, 2021.

Current wording

The provision for credit losses on loans is based upon management’s estimate of future expected credit losses in the loan and lease portfolio and its evaluation of the adequacy of the ACL. Our provision for credit losses in 2024 totaled $12.8 million, compared to $16.5 million in 2023, and $6.6 million in 2022. Net charge-offs recorded in 2024 totaled $14.2 million, compared to net charge-offs of $23.3 million recorded in 2023, and net charge-offs of $1.6 million in 2022. The significant charge offs in 2024 were comprised of one commercial credit, and four commercial real estate credits, offset by one significant commercial real estate recovery. Our ACL on loans to average loans was 1.1% as of December 31, 2024 and 2023, compared to 1.4% at December 31, 2022.

Previous wording

Although management believes the ACL is sufficient to cover expected losses over the estimated life of our loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan and lease losses or that regulators, in reviewing the loan portfolio, would not request us to materially adjust our ACL at the time of their examination. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, with the adoption of CECL, provision expense may be more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

Current wording

Although management believes the ACL is sufficient to cover expected losses over the estimated life of our loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan and lease losses or that regulators, in reviewing the loan portfolio, would not request us to materially adjust our ACL at the time of their examination. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, provision expense may be more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

Previous wording

During 2023, the release of credit losses on unfunded commitments totaled $1.6 million, and the allowance for unfunded commitments totaled $2.7 million as of December 31, 2023. Management reviewed the securities portfolio for credit loss exposure, and determined that no allowance for credit losses on securities was required for 2023. See Note 4 to the Consolidated Financial Statements for more detail on the ACL for securities analysis performed.

Current wording

During 2024, the release of credit losses on unfunded commitments totaled $834,000, and the allowance for unfunded commitments totaled $1.9 million as of December 31, 2024. During 2023, the release of credit losses on unfunded commitments totaled $1.6 million, and allowance for unfunded commitments totaled $2.7 million as of December 31, 2023. Management reviewed the securities portfolio for credit loss exposure and determined that no allowance for credit losses on securities was required for 2024 or 2023. See Note 4 to the Consolidated Financial Statements for more detail on the ACL for securities analysis performed.

Previous wording

Other real estate owned (“OREO”) increased to $5.1 million as of December 31, 2023, compared to $1.6 million as of December 31, 2022, reflecting a $3.6 million increase. During 2023, we transferred six OREO properties from loans with a total fair value of $5.6 million, and we sold nine properties which had a net book value of $2.8 million. Net gains on the sale of OREO properties during 2023 totaled $256,000, compared to net gains on sale of OREO properties of $163,000 in 2022 and $41,000 in 2021. The OREO valuation reserve decreased to $118,000 in 2023 compared to $856,000 in 2022.

Current wording

Other real estate owned (“OREO”) increased to $21.6 million as of December 31, 2024, compared to $5.1 million as of December 31, 2023, reflecting a $16.5 million increase. During 2024, we transferred five OREO properties from loans with a total fair value of $19.4 million, net of participations and valuation adjustments, and we sold three properties which had a net book value of $2.8 million. Net gains on the sale of OREO properties during 2024 totaled $390,000, compared to net gains on sale of OREO properties of $256,000 in 2023 and $163,000 in 2022. The OREO valuation reserve increased to $1.9 million in 2024 compared to $118,000 in 2023.

Previous wording

Other real estate assets transferred from loans are recorded at the fair value of the property when transferred, less estimated costs to sell, establishing a new cost basis. The OREO valuation reserve for the year ended 2023 was $118,000, which was 2.3% of gross OREO at year-end 2023. This compares to $856,000, or 35.4%, of gross OREO, net of participations and purchase accounting adjustments, at year-end 2022.

Current wording

Other real estate assets transferred from loans are recorded at the fair value of the property when transferred, less estimated costs to sell, establishing a new cost basis. The OREO valuation reserve for the year ended 2024 was $1.9 million, which was 7.9% of gross OREO at year-end 2024. This compares to $118,000, or 2.3%, of gross OREO, net of participations and purchase accounting adjustments, at year-end 2023.